Introduction
Compound interest is one of the most powerful financial tools for building wealth over time. It involves earning interest not only on the initial amount of money invested but also on the accumulated interest, leading to exponential growth.
How It Works
- Initial Investment: You start with a principal amount.
- Interest on Interest: Over time, interest is calculated on the principal and previously earned interest.
- Exponential Growth: As your balance grows, the interest you earn increases, creating a snowball effect.
Example
Let’s say you invest $1,000 at an annual interest rate of 5%, compounded annually. After 10 years, your investment will grow to approximately $1,628, with $628 being interest earned.
Benefits
- Maximizes Returns: The longer your money stays invested, the more it grows.
- Passive Wealth Creation: Once invested, your money works for you without extra effort.
Conclusion
Understanding and leveraging compound interest can lead to significant financial growth over time, whether through savings accounts, investment portfolios, or retirement plans.